Week of Jan 15

Before the key economic release of US CPI, markets were constrained by geopolitical events and fading expectations of further rate cuts from the Fed. The coming week features a busier economic calendar with the release of China's GDP and various countries reporting their own CPI figures.

Week in Review

Early in the week, market sentiment was influenced by speeches from Fed officials ahead of the highly-anticipated December CPI. US headline inflation came in marginally higher than forecasts, although the core rate, which is more closely monitored by policymakers, rose at its slowest pace since May 2021. The initial market reaction saw yields edging higher, but the session ended mixed, with the DXY sticking around 102 for the week. However, analysts generally concurred that the data did not alter the Fed's policy outlook. Meanwhile, the Atlanta Fed revised its fourth-quarter US GDP growth estimate to an annualised 2.2% from the previous projection of 2.5%.

Several countries reported trade statistics, with China posting a surprise increase in imports and exports. This followed an earlier jump in Australian exports, which appears to be attempting to reclaim 67 cents. Australia's CPI showed an unexpected decline as well. US exports also beat forecasts, contributing to a narrative of resilient global trade notwithstanding challenges in the Red Sea region.

On the geopolitical front, US-led coalition forces in the southern Red Sea launched retaliatory air strikes against Houthi rebels threatening commercial vessels transiting the Bab-el-Mandeb strait, supporting higher crude prices.

The UK reported stronger-than-forecast economic activity in November, although prior revisions implied recession risks remain. The data came after BOE Governor Andrew Bailey warned MPs that inflation risks had yet to dissipate fully. Still, Footsie traders saw an opportunity following three days of steep declines. However, they failed to gain traction past 7675, keeping risk at 7600 intact.

Biggest Market Movers

• A choppy week driven by inventory builds, geopolitics, and China sent oil prices to $75. $77 is up next, with support maintained at $71 a barrel.
• US stock indices rose except for the small-cap Russell 2000, which ended the week relatively flat. The index declined as traders weighed the prospects of persistently elevated interest rates disproportionately impacting smaller firms.
• Gold gained less than 1% in the week into the close following Middle East tensions and markets shrugging off US inflation. $2065 is resistance above $2050 an ounce, with support steady at $2030.

Top Events in the Week Ahead

East Asia Comes Into Focus 

US markets will be closed on Monday for a public holiday, focusing on East Asia early next week with the release of Chinese economic metrics and Taiwan's election results.

Analysts forecast 1.2% Chinese GDP growth for the final quarter of 2022, lifting the annual rate to 5.3% and above the government's 5% target. Chinese retail sales are projected to have grown in December too.

Japan's headline inflation is seen cooling slightly, although the closely-watched 'core-core' rate excluding food and energy is projected to hold at 3.8%, nearly doubling the BOJ's target. USDJPY met stiff resistance at 146.50, with continued pressure exposing 143.

Australian consumer confidence and jobs data are also scheduled.

UK Data Barrage to Sustain Uncertainty

The UK calendar this week starts Tuesday with the publication of employment data expected to show ongoing labour market slackening despite continuing strong hiring. Wednesday should see UK inflation ease through both headline and core rates. Signs of a slowing economy may emerge in end-week retail sales, projected to show diminishing dynamism. The pound has been relatively flat in the past weeks, with a break outside of 1.26-1.28 potentially offering direction.

Continuing Disinflation Narrative

Germany's full-year GDP figures due this week are forecast to show Europe's largest economy contracted in 2023. The EURUSD pair is also in consolidation, fluctuating between 1.09 and 1.10, with 1.08 and 1.1040 in focus past that.

Canada's CPI is anticipated to decline further, although the closely-watched trimmed mean rate may hold steady at 3.5% annually. USDCAD reaching 1.3440 saw substantial profit-taking, potentially opening the door to 1.33.

Other Events, Earnings

Monday sees the start of the bi-annual Eurogroup meeting. Key releases include German ZEW sentiment on Tuesday, US retail sales and housing data on Wednesday, and Japanese machinery orders and US building permits on Thursday. The University of Michigan consumer confidence is due on Friday.

Corporate earnings season ramps up with major banks and industrials reporting, including Morgan Stanley, Goldman Sachs, Kinder Morgan, Prologis, Fastenal, Schlumberger and Fifth Third Bancorp.